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Courts Continue to Raise the Bar for ROR Letters

Recently, it seems like courts are finding reservation of rights (ROR) letters to be ineffective, more often than not. Such was the case when the District Court for the Northern District of Georgia, applying Georgia law, held that an insurer that defends its insureds before reserving rights is estopped from later denying coverage. While this may seem obvious, the facts giving rise to the court’s decision are so common that this case should give us pause.
Following a work-site accident, an employee of a subcontractor of the insured, a general contractor, commenced a lawsuit against the insured. The insured provided notice of the claim and the underlying action to its commercial general liability insurer. The insurer then issued an ROR letter to its insured and retained counsel to defend. Approximately 6 days after the ROR was mailed, the insurer’s assigned defense counsel filed an answer on behalf of the insured. Thereafter, the injured employee claimant amended his complaint to add claims against two officers/employees of the insured. The insurer then assigned the same attorney already defending the insured to also defend its officers/employees and that attorney filed an answer on their behalf. Approximately three months later, the insurer issued two additional ROR letters to the officers/employees of the insured.
The officers/employees challenged the efficacy of the second and third ROR letters because the letters were issued after counsel had been retained to defend them and after an answer had been filed on their behalf. This dispute resulted in the insurer commencing its own coverage action, seeking a declaration that it had no duty to defend the underlying action. On a motion for summary judgment, the officers/employees argued that the insurer was estopped from denying coverage due to its failure to reserve its rights before providing them with a defense.
In Georgia, an insurer that defends an insured in the absence of an express and specific reservation of rights to deny coverage is estopped from later denying coverage. See World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 695 S.E.2d 6, 9-10 (Ga. 2010). The court held fast to this rule and determined that the insurer was estopped from denying coverage to the officers/employees because the first letter, sent before the officers/employees were added to the underlying action, was insufficient for the insurer to reserve its rights with respect to the officers/employees. Significant to the court’s determination was the fact that the insurer defended the officers/employees in the underlying action for nearly three months before issuing the second and third ROR letters. The court’s analysis did not include any discussion of whether the officers/employees were prejudiced by the insurer’s delay in issuing the RORs.
This case illustrates the importance of insurers (and their monitoring counsel) reviewing closely amended pleadings and raising coverage issues in writing to insureds as soon as those issues become known. It also highlights the risk that even if an insurer defends without a reservation of rights, it may lose its ability to exercise its rights under the policy.